Finance and Politics in the USA: From National City Bank to Citigroup : an American bank or a world bank ? Christine Zumello Université Sorbonne Nouvelle – Paris 3 Introduction As the theme of this year’s EBHA Conference hinges around the link between the wealth of nations and international business, this paper aims at trying to analyse the positioning, since its creation, of one American bank (Citibank) within the American political domestic scene and the wider globalization of financial services. The banking landscape in the USA has been shaped by various political and economic forces throughout the years and the interaction between banks and the state has, in the case of Citibank 1, been particularly close and has, in t 200political(?)” market forces. Indeed, the role of globalisation and the number of mergers and acquisitions in the banking sector in the USA which has increased in the last decade 2 has clearly contributed to the blurring of the frontiers between domestic and international boundaries in financial operations. Citigroup has managed to hold both a strong local-consumer base together with a wide international network which has involved it in a number of emerging markets and even micro-finance development today. Hence when one discusses the interactions between finance and politics, one realises that, in the United States, historical events have played a significant role in explaining the idiosyncrasy of the American banking landscape but one may wonder whether finance could have, on the domestic political scene in the USA, managed to outweigh politics or rather to free itself from political considerations. 1 Throughout this paper, and for readability purposes, we will often use the name Citibank and then Citigroup (since 1998) but the bank’s name has been modified to accommodate regulatory changes. 1812: City Bank of New York 1865: National City Bank of New York 1955: First National City Bank of the City of New York 1962: First National City Bank 1968: First National City Corpotation 1974: Citicorp 1976: Citibank N.A. 1998: Citigroup. 2 Rhoades, Stephen A., “Bank Mergers and Banking Structure in the United States, 1980-98”, Staff Study 174, Board of Governors of the Federal Reserve System, August 2000. 1 I - Historical background: Inside and Outside, National City Bank and political adjustments National City Bank was chartered in 1812 , amid the “banking ethos” that pervaded New York state at the time [Wright, 1998, p.542]. It was then strictly a state chartered bank and it is, by its longevity, one of the oldest banks in the United States. It has been on many occasions running ahead of regulations and political decisions and legislation. Several political and financial turning points will be addressed here and in each of them National City Bank played a major role. A- Banking legislation at the time of the Civil War The seminal American banking legislation that was enacted during the Civil War in the United States was very much modelled on the New York State Banking Act of 1838 which preserved the principle of free entry into banking subject to a minimum capital requirement [Cleveland, 1985, p. 25]. Until the Civil War and since the beginning of the 19 th century, banks chartered by individual states dominated the American banking scene. Under this system, the laws governing capital and reserve requirements, note distribution and loan management differed from state to state; this “wild cat” banking era came to be dominated by certain state bank systems which were quite sound especially in the North East whereas other state bank systems, especially along the western frontier were unstable and often poorly managed. Hence, an informal hierarchy of banks was thus established in the United States throughout the 19 th century. In this hierarchical system, banknotes issued by state banks were in general heavily discounted by eastern banks due to lack of credibility of some Midwestern of frontier banks as well as the lack of anything like a national unified banking system [Ritter, 1997]. We thus witness the development of a banking stronghold around the New York area in the second half of the 19 th century. Furthermore, the frequent panics that recurrently plagued the American economy at the time, which led to the failure of over-extended banks, And to the adoption by Congress of a National Banking System in 1863 an 1864. The Congress had initially intended for the national banks to eventually replace the state banks, and the number of state banks did decline in the 1860s to the advantage of national banks. Basically, the Congress was seeking three objectives. One, it sought to create a uniform national currency (the greenback) which would 2 be guaranteed by public credit. Secondly, the National Bank Acts established a reserve structure to provide a safety net. Indeed, banks were required to hold a substantial reserve from their total notes and deposits outstanding but in the absence of a central bank which could hold these reserves, they were placed in national banks in designated reserve cities. This reinforced the pyramidal and hierarchical structure of the banking system in the United States since banks scattered in the country would have to hold reserves with a reserve city bank which in turn would hold reserves with a New York City national bank. The very central position of New York as a banking hub was thus definitely politically enshrined by the 1860s banking legislation 3. B- A central bank at last: the Federal Reserve System At the beginning of the 20 th century, the absence of a central bank in the USA 4 proved problematic and the near bankruptcy of the City of New York in 1907 was avoided thanks to two private banks: Citibank and J. P. Morgan. James Stillman had tried from the very beginning of his tenure at the helm of Citibank to turn the bank into the American government’s bank [Cleveland, 1985, p. 47] in particular as an issuer of Treasury bills and Treasury bonds. After 1912, the US Congress, under the impetus of newly elected democratic president Woodrow Wilson, embarked on the drafting of legislation which would set up a central bank under a new guise in order to ressucitate what seemed “economically desirable but [had been] politically impossible” in the previous attempts at creating a central bank [Cleveland, 1985, p. 68]. The drafting of the banking legislation was entrusted to Carter Glass, a democratic congressman from Virginia who was the chairman of the subcommittee of the House Committee on Banking and Currency. Frank Vanderlip, the chairman of National City Bank voiced his opposition to Glass on the grounds that Congress had neglected bankers’ advice on the framing of the bill. 3 See Irwin UNGER, The Greenback Era; A Social and Political History of American Finance 1865-1879 , Princeton University Press, 1964. 4 The very idea of establishing a central bank in the USA has been a sore political issue ever since the first one was established in 1791 (Bank of the USA in Philadelphia). Indeed, it raised a strong opposition from the Anti- federalists who campaigned against the Bank on constitutional grounds. The charter of the bank which expired in 1811 was not renewed by Congress and the second Bank of the USA was short-lived, from 1816 to 1832. The charter was merely renewed in 1816 to try and weather the financial demands of the 1812 War with England and of the abuses of banking privileges by the state chartered banks. President Andrew Jackson did not renew the charter if the second Bank of the USA when it expired in 1832. 3 The Federal Reserve Act was signed into law in December 1913 and it heralded the third attempt at creating a central bank in the USA here under the more decentralised form of the Federal Reserve System which was organised – and still is – around 12 regional reserve banks which encompass the whole territory of the United States. “ The public policy role of National City Bank had played as the leading bank in a nation without a central bank was necessarily curtailed and it turned more into a business bank than a bankers’ bank” [Cleveland, 1985, p. 71]. The political achievement of restoring a central bank in the United States seemed at first to run counter to the more private interests of National City Bank in particular as a partner of choice for the government’s banking operations but that was soon to be mended since Charles E. Mitchell would combine the positions of chairman of National City Bank (February 1929 – February 1933) and director of the New York Federal Reserve Bank 5. The Federal Reserve Act, furthermore, enabled national banks to have branches outside the United States and thus National City opened its first overseas branch in Buenos Aires, expand overseas and start building its international reach; the international reach that National City Bank enjoys today is due to more external forces related to the irresistible globalisation of financial markets. The implicit domestic backlash for National City Bank inherent in the adoption of the Federal Reserve Act was nonetheless weathered by a wider international opening which was hencewith made possible. Frank Vanderlip, from then on, aimed at building an all-purpose, worldwide financial intermediary. And he wrote James Stillman on 31 st December 1915: “We are really becoming a world bank in a very broad sense, and I am perfectly confident that the way is open to us to become the most powerful, the most serviceable, the most far-reaching world financial institution that there has ever been” [Cleveland, 1985, p. 88] The global network of National City was then well under way.